If not, you are not part of the small circle of cognoscenti who know what makes the world go ’round – at least in Medicare. To enter the circle, read on.

In my post last week, I described how Medicare pays physicians for the services they render Medicare beneficiaries. In a nutshell, for a particular service (e.g., a routine office revisit or an appendectomy or a heart transplant) that we shall call Z, Medicare pays a fee calculated with this formula:

FeeZ is the dollar amount of the fee paid for the service, Work RVUZ denotes the relative value units for the physicians’ work going into the production of service Z, PEZ denotes the relative value units of the physician’s practice expenses allocated to service Z and PLIZ denotes the relative value units for the professional liability insurance premium allocated to service Z.

Each of these three relative cost factors is adjusted for its own geographic price index, GPCI in the equation. Thus, there is one GPCI for the physician’s work, one for practice expenses and a one for malpractice premiums.

The sum of these three RVU components, adjusted by their GPCIs, is multiplied by CV, the conversion factor. This is the dollar amount that Medicare pays for one overall RVU.

This conversion factor is updated annually in a vaguely amusing ritual of which I shall write in the future. It currently stands at $36.0846. (For a history of these conversion factors, click here.)

The fee for service Z might be further adjusted by multipliers that reward physicians for working in an area with a shortage of physicians and other factors. (For more detail, click here.)

In response to my previous post, some commentators asked for a numerical illustration — so here it goes.

Work RVUs: 0.92, Practice Expense RVU 0.72, Malpractice RVU 0.03. Assuming for simplicity that all geographic price indices – the GPCIs – are 1 for this hypothetical physician’s location, the total RVUs for this service are 1.56. It would be slightly different if the GPCIs were not all equal to 1.

The RVUs in this illustration are for 2008. If they have not changed since that time, and at today’s conversion factor of $36.0846, the physician would be paid a fee of $36.0846 x 1.56 = $56.29 for that service (Code 99213).

By contrast, the total RVUs for a “left heart catheterization” (code 93510) are 40.54, of which 33.61 are related to practice expenses. The fee for that procedure at today’s conversion factor would be $1,462.87.

In this example from the American Academy of Family Physicians, the Work RVU for a “level III-established patient office visit” (Code 99213) in 2008 was not 0.92, but only 0.8806, because the 0.92 had been adjusted for “budget neutrality reasons.” What is that?

Here is where the mysterious RUC (pronounced RUCK) comes in.

Think about the RVUs underlying the Medicare fee schedule. They are thought to reflect total relative practice costs, including the physician’s own time, for each of the 7,000 distinct physician services in the schedule. These underlying relative cost estimates were developed from carefully described medical-case vignettes submitted to groups of physicians who were then asked to tell the surveyors how much “physician work” each vignette entailed relative to some base vignette (e.g., a routine office revisit). This established the physician-work RVUs.

The Centers for Medicare and Medicaid Services, known within the health-care sector as the C.M.S., an agency within the Department of Health and Human Services that administers Medicare, then adds physician expense and malpractice RVUs to these Work RVUs to arrive at the total RVUs for a service.

Even if we assume that at some point the 7,000 or so RVUs in Medicare’s relative value scale accurately reflected the true total relative practice costs, it must be the case that these RVUs change over time, because of rapid advances in medical technology.

Operations that may have taken two hours and required hospitalization in 1995, for example, may now be performed by physicians in half the time and in an ambulatory-care setting. Furthermore, entirely new services have come on line that did not exist when the fee schedule was established.

Who makes the required adjustments in the RVUs?

De jure it is the C.M.S.

De facto, it is the American Medical Association’s Specialty Society Relative Value Scale Update Committee, otherwise known as — you guessed it — the RUC.

The RUC is a group of 29 physicians drawn from a variety of medical specialties. It was established by the A.M.A. in 1991 to advise the C.M.S. on recalibrations of the relative value scale underlying the Medicare fee schedule.

In 1991, as a commissioner on the Physician Payment Review Commission of Congress, I thought the RUC was a useful institution. I continue to believe so.

There is, in my view, great merit in government’s solicitation of the views of the profession whose economic affairs are being partially determined by the Medicare fee schedule. We should be thankful for the dedicated physicians who devote so much of their time to serving on the RUC Indeed, the C.M.S. recently wrote to the RUC, acknowledging its debt to these physicians.

As it happens, however, the C.M.S. tends to accept the RUC’s recommendations on RVU changes more than 90 percent of the time, which effectively makes the RUC the final arbiter in these matters. I do not believe that slavish acceptance of the RUC’s recommendations is a good thing, if only because the physicians on the RUC do labor under at least the appearance of a conflict of interest.

Medicare requires changes in the RVUs to be budget neutral overall, effectively forcing a zero-sum game on the RUC. This means that when the RUC recommends raising the RVU for some services, the RVUs of other services must be decreased. That adjustment has led to the “budget neutrality adjustment” in the American Academy of Family Physicians’ numerical example shown above.

Primary physicians have long complained that they are outgunned by specialists on the RUC in this zero-sum game. They assert that the RUC has thus contributed to the relatively low pay of primary care physicians and to the shortage of primary care now being lamented all over the country.

To illustrate that these primary care physicians have a good case, consider a fascinating recent study of physician incomes produced for Medpac, the Medicare Payment Advisory Commission of Congress. Shown below is one chart from that study. The figures shown in this display are net income after practice expenses but before income taxes.

Urban Institute and the Medical Group Management Association Center for Research (for the Medicare Payment Advisory) Commission

Surely there is something absurd when a nation pays a primary care physician poorly relative to other specialists and then wrings its hands over a shortage of primary care physicians. Is it so hard to understand why young physicians, emerging as they do from long and arduous training, exhausted and deeply in debt, let expected future financial reward be a major factor in choosing their specialty?

In a highly critical article, The Wall Street Journal recently described the modus operandi of the RUC, as did the Center for Public Integrity. These are well worth reading, as is the American Medical Association’s brisk response to the criticism (and again here).

So what are we to make of it all?

I would prefer that the C.M.S. declare “Independence Day” when it comes to recalibrating the RVUs.

To be sure, the C.M.S. should continue to seek input from the RUC. But I concur wholeheartedly with the Medpac’s recent recommendation that a truly independent body of experts (including economists and third-party payers) render a second opinion on RUC recommendations.

Specifically, this independent body should focus on frequently billed codes that, in the light of current medical technology, may be relatively overpriced in Medicare’s relative value scale. The C.M.S. has already asked the RUC to do this. That task should be delegated instead to the truly independent body.

All of which requires, of course, that Congress properly fund the C.M.S. administrative budget for all that agency is asked to do.

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